Enlightenment Through Understanding

Sam Harris’ takedown of Nassim Taleb

I don’t agree with Sam Harris on everything, although I agree with him about Islam being a threat to western civilization, about the perniciousness of SJWs and political correctness, about some aspects of ‘materialist philosophy’, his denial of free will, and his criticism of Nassim Taleb.

Taleb has a history of bullying people who are smarter than him, such as Steven Pinker and Sam Harris. Like the postmodernists described by Jordan Peterson, Taleb does not engage in productive debate. When challenged on Twitter, Taleb does one of two things: berate the person publicly (if the person is a public figure) or block (everyone else). Although nowadays being attacked by Taleb is considered a badge of honor–it means you’re doing something right, such as defending HBD research or setting fire to one of Taleb’s numerous strawmen, inconsistencies, and misconstructions.

Taleb criticizes Harris for not having a lot of published original research, yet neither does Taleb. In fact, Taleb’s CV is as sparse as the hair on his head, consisting of just two or so publications since 2004 in low-impact journals. Taleb’s ‘research’, which is not peer reviewed, is to generate Mathematica renderings and call it ‘research’. Note to Taleb: rendering functions on Mathematica and then pasting them in a PDF book is not peer-reviewed research; it only demonstrates you know how to use Mathematica and how to make PDF files. Although Mathematica is a powerful software, it is also a crutch for the mathematically inexperienced. Taleb posting on Twitter his Mathematica renderings does not confer with any actual knowledge of higher-level math, but only that he can do a reasonable job pretending he does.

As quoted by Harris, only Nasism Taleb thinks Nasism Taleb a genius (and maybe Taleb’s most devout followers). If by ‘genius’, bullying actual geniuses on Twitter and appropriating existing knowledge as his own, that is a pretty low bar for what constitutes genius.

But you’re probably thinking, “yeah, Taleb may be a tool but he invented the ‘Black Swan’ concept, which is very important and influential, so give him credit for that.”

This is wrong on two counts:

The idea behind the ‘black swan’ is not original, but rather it is Taleb’s reformulation of the ‘peso problem‘, which was first studied by Milton Firedman and Kenneth Rogoff in the 70′s–three decades before Taleb published The Black Swan, but due to all the media coverage Taleb has gotten, people assume it was Taleb’s original insight, which obviously it was not. From Wikipedia, “The Peso problem in finance is a problem which arises when ‘the possibility that some infrequent or unprecedented event may occur affects asset prices’. The difficulty or impossibility of predicting such an event creates problems in modeling the economy and financial markets by using the past.” That is the same as Taleb’s ‘turkey problem’, yet Taleb took that single insight and turned it into a lucrative publishing and public speaking career. The liberal media refuses to give the full story of who actually originated the black swan concept and continues to give Taleb free publicity. The media only promotes people who are useful idiots, not those who have actually insightful observations.

Second, in terms of trading and risk management, there is no money to be made in the long-run with ‘black swan methods’. The only way money is made is by selling books, speaking engagements, and $7,000/week seminars about the purported efficacy of such black swan methods, when such methods don’t actually work. The technical reason has to do with how index options are priced. Taleb, again spreading falsehoods, says that options are priced through a strict Black-Scholes model that does not admit a steep skew. In reality, out-of-money options are priced not with the simple Black Scholes model but with a far more complicated stochastic volatility jump diffusion model, that accounts for black swan events, and hence is why the out-of-money S&P 500 options that Taleb advises people buy are vastly overpriced. Such options have a very steep skew which makes them too expensive to ever provide a positive expected value over the long-run if purchased. Taleb makes the implicit assumption such options can be purchased for fractions of a penny, but in reality they cost much more.

In a paper, Taleb argues that selling OOM (out-of-money) puts is a bad idea due to the volatility explosion, but this assumes that options are priced strictly under the Black Scholes framework and that options can be traded at infinitesimally small fractions of a penny. In reality, the volatility smile or skew makes these far OOM put options much more expensive than assumed by Taleb and the Black Scholes framework, thus substantially limiting potential profit. Also, there is a minimum ‘ask’ price for OOM puts, usually a couple cents. The huge multipliers given by Taleb are under the assumption you can buy OOM options for infinitesimally small fractions of a penny, which you obviously can’t.